Today’s (5-01-24) home price reports show the significant increase in cost to a first-time home buyer if they had decided to wait for interest rates to drop before buying their home.

If a person decides to wait a year before buying a home, in the hopes that interest rates will drop, right off the bat they will be losing about 1% in equity they would have gained from the normal amortization of their loan balance through their regular principal payments over 12 months. So, interest rates would have to drop at least 1% in 12-months just to break-even with the amount of equity they lost during this time period by sitting on the sidelines and not amortizing their loan.

Then during this 12-month time they are waiting for rates to get better, if home prices increased by 7.0%, they would have had pocketed a 7% equity gain in their home if they had bought it 12-months ago, and now they are paying a 7% higher cost to buy the same home and their mortgage amount will be 7% larger, and their monthly mortgage payment would be 7% larger, before adjusting for any up or down change in interest rates. In my opinion, if a first-time homebuyer absolutely loves a home that is for sale, and they would like to own this home for 10-years, they protect themselves by buying the home today with a 30-year fixed-rate mortgage that that can prepay at any time without a penalty. This is a head you win, tails you win bet on interest rates and on home prices. If rates go higher, they can thank their lucky stars that their LO and realtor advised them to lock in their rate. If rates drop, they can refinance to the lower rate. In the meantime, they have also protected themselves from rising home prices. If home prices continue to appreciate, this will put more equity value into their home, and they protect themselves from having to pay more to buy the same home one year later, which could more than offset any benefit from a lower interest rate.